Costco 2008 Annual Report Download - page 83

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investigation, the U.S. Attorney’s Office has served a grand jury subpoena on the Company seeking
documents and information relating to its stock option grants. The Company is cooperating with the
inquiry and at this time cannot reasonably estimate any loss that may arise from this matter.
The Environmental Protection Agency (EPA) issued an Information Request to the Company, dated
November 1, 2007, under the Clean Air Act. The EPA is seeking records regarding warehouses in the
states of Arizona, California, Hawaii, and Nevada relating to compliance with regulations concerning
air-conditioning and refrigeration equipment. A similar request, dated January 14, 2008, has been
received concerning a warehouse in New Hampshire. If the EPA determines that violations have
occurred, substantial penalties may be levied. In April 2008 the Company received a similar request
from the South Coast Air Quality Management District concerning certain locations in Southern
California. The Company has responded to that request. The Company is cooperating with these
inquiries and at this time cannot reasonably estimate any loss that might arise from these matters.
The Company has received notices from most states stating that they have appointed an agent to
conduct an examination of the books and records of the Company to determine whether it has
complied with state unclaimed property laws. In addition to seeking the turnover of unclaimed property
subject to escheat laws, the states may seek interest, penalties, costs of examinations, and other relief.
Except where indicated otherwise above, a reasonable estimate of the possible loss or range of loss
cannot be made at this time for the matters described. The Company does not believe that any
pending claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse
effect on the Company’s financial position; however, it is possible that an unfavorable outcome of some
or all of the matters, however unlikely, could result in a charge that might be material to the results of
an individual fiscal quarter.
Note 11—Staff Accounting Bulletin No. 108
In September 2006, the SEC released SAB 108. The transition provisions of SAB 108 permitted the
Company to adjust for the cumulative effect in retained earnings of immaterial errors relating to prior
years. Such adjustments do not require previously filed reports with the SEC to be amended. In
accordance with SAB 108, the Company adjusted beginning retained earnings for 2006 for the items
described below. The Company considers these adjustments to be immaterial to prior periods.
Review of Stock Option Grant Practices
Following publicity regarding the granting of stock options, the Company initiated an internal review of
its historical stock option grant practices to determine whether the stated grant dates of options were
supported by the Company’s books and records. As a result of this preliminary review, a special
committee of independent directors was formed. The Company filed a Form 8-K dated October 12,
2006, which provided details regarding the special committee’s review. The special committee
engaged independent counsel and forensics experts, and comprehensively reviewed all equity grants
made during the years 1996 through 2005. In late September 2006, the special committee reported its
conclusions and recommendations to the board of directors, which, after further review, adopted these
conclusions and recommendations. The review identified no evidence of fraud, falsification of records,
concealment of actions or documentation, or intentional deviation from generally accepted accounting
principles. The review indicated that, in several instances, it was impossible to determine with precision
the appropriate measurement date for specific grants. For these grants it was feasible only to identify a
range of dates that included the appropriate measurement dates, where some dates in the range were
after the recorded grant date.
The subject grants were made to over one thousand of the Company’s employees, including, among
others, the Company’s warehouse managers and buyers. None of the options in which the review
identified imprecision in the grant process were issued to the Company’s chief executive officer,
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